So, what is a Chart of Accounts (COA)? In a nutshell, it’s the list of accounts that have been set-up in your Accounting Software to record all the different revenues and costs in your business.
A well thought out COA can drive real business benefits, it’s not just a means of recording data. A poorly designed COA can hamper the quality of performance information and meaningful insight.
Here are some examples of the impact of a poor COA:
- Reports don’t readily produce the information the organisation needs to properly run the business.
Impact: Critical decisions can be made upon poor information, In order to get reliable and insightful information a manual effort is needed to manipulate or re-sort data which can be inefficient and expensive.
- Reports don’t meet tax and/or regulatory needs
Impact: It’s possible that you could be paying more tax than you need to and the preparation of your tax returns can be pricy as Accountants end up doing further analysis to ensure regulatory needs are met.
- General ledger accounts aren’t used consistently
Impact: If it’s not clear where an expense should go, one day you could report it as a Cost of Sale and the next it could be a Marketing expense; this results in inconsistent reporting.
- There is no link between key performance indicators and the COA
Impact: Your Sales Team might be targeted on a sales matrix but if it’s not being captured accordingly in your COA then a manual effort is needed to ensure you are paying them correctly.
Looking again at point 3, if you are targeted on Gross Profit then what you post to Cost of Sales impacts this directly.
- The COA has not kept up to date with changes in business models/plan.
Impact: Your business model/plan is likely to change every now and then and a key indicator for the management team is performance against business plan. If you can’t capture the actual performance data in the same way as the business plan it’s going to be difficult to track this.
A Company can function with a poor COA, but effort is needed when the data is extracted. This can be very costly and the Finance organisation often has to spend many hours manipulating or re-sorting the data to get the right information to support decision making and provide accurate performance information.
The regulatory requirements made of Companies are becoming more complex and organisations need to understand their financial health and manage their performance. The COA is central to all of this, get this right and the value will follow.
Contact us now if you would like to discuss your Chart of Accounts. firstname.lastname@example.org